Buyers aware: Cloud ERP a selling point in M&A space

Private equity firms and other corporate acquirers are paying closer attention to whether their targets have cloud-based accounting and ERP systems, according to consultants.

In general, PE firms like to see that a potential acquisition has a cloud-based ERP, or enterprise-resource planning, system, said Doug Wiescinski, partner at accounting firm Plante Moran.

“We’re seeing private equity firms becoming more and more attracted to cloud-based solutions, cloud-based accounting systems or cloud-based, full-fledged ERP systems,” Wiescinski said. “A lot of them see a huge advantage because of the lack of capital requirements associated with implementing a cloud solution. You don’t have to buy hardware; you don’t have to buy the software. You basically pay for it as you consume it or use it.”

Private equity firms also like the fact that a company with a cloud-based ERP solution can be brought on board more quickly than if the company has an on-premise solution, Wiescinski said

“They like the speed; they like the idea that there’s not a big capital expenditure to get these systems up and running. And candidly they like the back end of it as well” — the system are as easy to divest as they are to launch, Wiescinski said.

When a subsidiary has a different accounting system or ERP software than the parent company, especially with large multinational groups, it isn’t uncommon for the parent to leave the system in place, said Timothy Chou, a Stanford University professor and former president of Oracle on Demand. That’s because of the effort that would be involved in changing the subsidiary’s system to bring it in line with the parent.

“Some of this also has to do with, as you see [mergers and acquisitions] occurring, it’s hard to unhook financial systems,” Chou said. “So you’ll end up with: you bought a company in Australia, they’re running on Quickbooks, and corporate is running on SAP.”
More and more, the buyers or potential buyers seek information about accounting and ERP systems during the due diligence process, Wiescinski said.

“They’ll ask what type of systems the target company has; what type of commitments they have financially,” he said. “They’re just getting smarter about understanding the ongoing costs associated with the IT environment.”

A target company, for example, may be paying for a software license, or a network or hardware, over a five-year commitment, Wiescinski said. “Or they just made major upgrade to hardware, spent half a million dollars on major hardware upgrades, and it’s a three-year amortization in year one. It’s the costs associated with that. If there’s implementation associated with it — some professional services—maybe they’re amortizing that over a period of time as well.”

For PE firms, the awareness and the weighing of the costs and benefits of cloud versus on-premise solutions have grown in recent years, Wiescinski said.

“We’re seeing more and more of the PE firms understanding the value and benefit of cloud, and we’re seeing them more, on a transaction, asking about cloud-based solutions as an alternative, whereas a couple of years ago, they didn’t focus much on IT at all, to be honest, or the ERP or accounting systems,” he said.

Wiescinski has also witnessed the appeal of cloud-based ERP for his clients, mostly in the middle market, that are expanding internationally. Instead of having a network connect from headquarters to each facility across the globe through a dedicated private network, a cloud-based ERP system allows for Internet connections, which are much less expensive, and provides access to data centers that can be located anywhere.

Vendors of accounting systems and ERP view the disparate post-merger systems of subsidiaries as a selling opportunity, Chou said.

“What Oracle and SAP and to some extent Microsoft will do is they’ll go in and what they’ll say is: ‘You’ve got all these disparate parts, you’ve got some stuff on Intuit, you’ve got some stuff here, blah blah blah, why don’t you bring it all together, and I will deliver to you a more complete solution,” Chou said.

“Typically from the vendor perspective, that’s what they will say,” he said. “They’ll go: Let me help you manage a bigger piece of complexity than just accounting. And, by the way, your accounting system is old and frail, and it would be better for you to be on Dynamics [ an accounting system]. That’s what Microsoft would say.”

When divisions of large companies are sold off, those divisions or their new owners often have to step in to handle accounting procedures that the previous parent had managed, said Thomas Risi, management consultant at Plante Moran.

“Any time you talk about an acquisition or divestiture, you’re talking about a significant amount of change, you’re talking about potentially the organization having to do things or develop people and areas that maybe they didn’t have to worry about previously,” Risi said. “And you’ve got the whole issue of developing new procedures, controls, etc., that were taken care of by the parent company.”

Another basic issue to consider is whether the acquired company will be added to an existing group of companies, or if it will be the “mother ship” to help establish a new group, Risi said.

“Is the acquisition a platform company or is it a fold-in company where there’s an existing platform company that the [private equity] fund already has, and you’re tucking in the acquisition?” he asked. “You need to have some foresight on: Where is this going? Is it just for this particular entity, this particular division, or are there going to be additional needs?”